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QE-U, China, and Great Economic Depression 2.0

Economics / Great Depression II Oct 12, 2012 - 10:03 AM GMT

By: Andy_Sutton


Best Financial Markets Analysis ArticleWith the pop from the USFed’s latest attempt at financial shock and awe already seeping from lackluster markets, and the teleprompter news networks losing steam over their promotion of the same, it is time to take a look back at the decisions made on 9/13/2012 and set the record straight on some things.

QEunlimited is not going to save the US Economy.

Perhaps one of the biggest misconceptions about all this easing is that it is somehow going to help the economy. To stimulate it. To bring it out of recession (yes, we’re still in recession). None of these things happened with the first two, but there are some very good reasons it won’t happen with the third. And the truth is there is a much more gruesome component to this latest scam.

As I’ve outlined many times before in these pages, what happens when the USGovt or banks buy up toxic mortgage securities is that they’re buying the note on your house – along with thousands of other notes since they’ve all been bundled up. You signed on the dotted line with Bank of America for example, but now maybe the Chinese own your house. Or the Japanese. Or European bankers. Or the USGovt. So the fed creating another $40 billion (that they’re willing to admit) each month to buy more mortgages ought to be a pretty scary thing. Will they foreclose on you if you can’t make your payments?

But it gets better. So now we’ve got banks with an extra $40 billion a month to play with. The notion sold to a comatose public is that this is good because the banks will lend the money to Main Street and this will save the economy. We’ve already shot that theory full of holes a dozen times and I’m not doing it again. What is curious though is that the banks aren’t going to lend the money out at all and this was never the intent. Instead, the intention is to use the majority of it to buy – you guessed it – USGovt debt. That’s the agreement that has been forged. Don’t forget that the fed works for its member banks – and regulates them too. If you’re still not doubled over in laughter, this group is going to monetize $40 billion a month (again at a minimum) of government debt while patting themselves on the back and telling us how great they are because they’re preserving our banking system, without which we could never survive.

So we’re right back with QEU where we were with the previous QEs. There is no intention of the USGovt to ‘get right’ and straighten its fiscal house, regardless of what the stuffed shirts tell you during their debates and campaign ads. The USGovt is a junkie, and is going to be getting a minimum of a half trillion a year in direct monetization above and beyond what its already getting.

Once again, the devil is in the details though. Let’s the say the USFed simply gave the $40B/month to the banks for their junk and let them take the money and play in the financial markets, we’d see stocks, bonds, commodities, and so forth rise. Common people who were invested in these markets – what few of them are left – might have a small chance of benefitting somewhat. However, by going through the government stimulus route, the GoverBank is ensuring that the vice that is already on many consumers is only going to get a little tighter.

Traditional QE has been proven ineffective at creating jobs. The few jobs that have been ‘created’ by all the stimulus to this point have been make work, part-time, or temporary in nature. Even the cooked government numbers bear that out. What QE has been effective at doing is tightening the screws on the majority of the country through price inflation. Nothing crazy yet, but everyone is noticing. Your elected officials know this and simply don’t care.

But let’s get back to the idea of the USFed or some foreign bank holding the title on your home. Many others and I have said for years now that the whole housing boom was nothing more than a giant property grab. The media has gone almost totally mum on foreclosures – as if the problem no longer exists. After all, we have donkeys chasing elephants around on stages all over the country; trying to convince you their way to ruin is best. Given the unlimited nature of QE on a global scale, it stands to reason that by the time this is over, the fed and the rest of the central banks around the world will hold the title on every piece of mortgaged real estate out there. Just as I wrote about the coup d’état going on in Europe, the same thing is happening here.

The progression is pretty simple. You take a mortgage with a small community bank who then sells it to a packager who rolls it up with a couple thousand other mortgages and in layman’s terms, it is sliced up and sold to various economic agents. The slices throw off interest as you make your monthly payments and so forth. Just like a traditional bond. Well, a bunch of these slices are no good and are being purchased by the USFed. Foreclosures are happening. Who owns the property now? You never owned it. You were renting it first from your community bank, and now from the USFed or whichever other entity owns your property. Some of these properties are sold to vulture funds and you can pay them rent to live in the house you once thought you owned. And our government pushes this as the American Dream? And don’t kid yourself for a second; the USGovt is quite the landlord as well, through Fannie and Freddie.

Just keep all this in mind while you bust your tail 40 or more hours a week if you can get them to make your mortgage payments. Your house, along with most of the rest of the property here in the US, is owned by people who did nothing to work for it. They simply typed a few keystrokes on a computer, declared themselves to be rich, and bought you out. I’ve said this many times before and apologize to those who already understand this, however, most still don’t – or refuse to – and so we’re going to keep hammering it until everyone gets it.

Keep Your Eyes on China

The media would love to have everyone think that China has been knocked out of the game because of a host of economic sins they’ve committed (which pale in comparison to our own sins). The IMF continues to downgrade growth forecasts for the global economy, engaging in a global game of good cop bad cop with the mainstream media and German newest Fantasyland resident Angela Merkel. She had the audacity, not austerity, to show up in Greece and assure the Greeks that the worst of the financial crisis was over. On Thursday, Greece lost its biggest company. Obviously not everyone believes Mrs. Merkel and her band of ECB/IMF cronies.

Let’s get back to China though. Conventional logic says China is dead because aggregate demand is slowing due to a global recession. Not to mention, the Chinese have allowed a real estate bubble, that makes America’s look like child’s play in comparison, blow up over the past several years. China’s ongoing business and economic model has been based on the continued expansion of consumption by the West, especially America and the Eurozone. However, unlike every other international ‘superpower’, the Chinese actually have a war chest – and it is filled to the gills with actual capital – not just phony printed currency like the war chest our government claims to have. Basically, China is in a position similar to where America was during Depression 1.0 with regards to the cookie jar of savings.

However, and as other analysts have already pointed out, the progression through turmoil always seems to be recession, depression, currency wars, trade wars, followed by world wars. Currently, we’re at stage 4 and waiting on the world war and nobody is rattling sabers as loudly as the Chinese. Consider the recent comments of Chinese President Hu Jintao:

“The navy should “accelerate its transformation and modernization in a sturdy way, and make extended preparations for military combat in order to make greater contributions to safeguard national security,” he said.

Addressing the powerful Central Military Commission, Hu said: “Our work must closely encircle the main theme of national defense and military building.”

China’s main dispute with Japan over the Diaoyu Islands has already sent shockwaves and panic buying as Chinese citizens load up on supplies, particularly salt.

Despite this, the Chinese are still an active global player, particularly in the Middle East, which is one of the major outposts they’ve sought to exert influence. At risk are precious oil supplies, and the stakes are growing by the day. Wars have flared up in a half-dozen nations already, stoked by the CIA-funded, America-backed al-Qaeda terror group. The Orwellian switching of the enemy cannot be ignored in this case. The destabilization of the Middle East is on, and countries like China and Russia have serious vested interests and investment in that region. They will not go quietly, that is assured. The election of Hugo Chavez to another 6-year term ensures that even more oil will be flowing eastward, making the Middle East even more critical.

China has already threatened to exercise its nuclear options with regards to bonds – on Japan of all nations, even ahead of the US. However, such an action would have an immediate and devastating effect on our bond markets since the Japanese hold so much USGovt debt. Think of a game of dominoes. Obviously a threat against Japan is a threat against America and the Chinese can stop the bond game any time they feel like it. As for America’s recourse? War? That’s about it. Tariffs? Good luck. How do you think Wal-Mart, etc. would look with all the ‘Made in China’ items gone? Sure, such a move would hurt China, but it would hurt the rest of the world an awful lot more. China has the wiggle room, the flexibility, and the leverage. We don’t. If you think its bad that the USFed or perhaps a Chinese bank holds the title on your house, think of the consequences of a geopolitical slip-up. We’ve been promised these times would be interesting, and in that regard we’re certainly getting our money’s worth.

Depression 2.0 – A Slow But Steady Progression

The soft depression continues in America under the watchful eye of people like Ben Bernanke, Jamie Dimon, and Mario Draghi. The social net, while still holding up reasonably well, is showing obvious signs of strain as more and more Americans either give up and fall into the clutches of dependency, or just decide sloth is the best policy and go on the government dole. After all, why should anyone take one of these ‘new and improved’ make work, temp, or part-time jobs when the government will pay for food, housing, medical care, schooling, heat, and even provide a free cell phone for doing absolutely nothing? America is rotting from the inside morally, just from the entitlement perspective.

I get constant emails accusing me of being a gloom and doomer and the common point made is ‘If this is a depression, then where are the breadlines?’ Simple. Food stamps. They didn’t have SNAP back in the 1930s, so people stood and waited in breadlines. Today, they get a debit card so they can go to the store and shop like everyone else. The only time anyone knows the difference is when the person checks out and that is only if someone notices that it is an EBT card. There don’t need to be breadlines on the street; we’ve got them in our stores. 100+ weeks of unemployment compensation? We certainly didn’t have that back in the 1930s either. Back then you lost your job and two months later you were homeless unless you had savings. We didn’t have credit cards to fall back on either. I would be willing to bet that a significant portion of the 5 million new iPhones that were sold the first weekend were bought by people who are on some type (or multiple types) of government assistance. How many others went into further debt to get one? Yet the USMedia will sit there and make the ridiculous assertion that the iPhone is going to save the USEconomy. This is level of ignorance that exists regarding the state of our world today.

ZIRP has another consequence and this ties into what was mentioned above with regards to the USFed holding the title on your mortgage. With home equity loan interest rates so low, many people who had previously ‘clear’ properties have raced back out and borrowed to remodel or whatever, putting them back on the chopping block. I’ll say this again for emphasis. By the time this monetization action is finished, the USFed will hold the title on every piece of mortgaged property in the United States. There is an excellent chance it’ll hold most (if not all) of the USGovt debt that isn’t already held by other entities like China, Japan, OPEC nations, either on its own or through its member banks. Again, what this means is that you’ll scrimp to pay your mortgage and your taxes, which will go directly to a group of banks that created your debt from nothing. Avoid debt like the plague no matter how attractive the ‘terms’ appear to be. For once we can learn from the mistakes of others.

We view sanitized news from Europe, almost completely unaware that we’re next. We’re one headline away. It is as simple as that. So perhaps these things should be kept in mind before turning on the latest edition of the political circuses, donning your donkey or elephant hat and declaring that your guy kicked the other guy’s tail. It really goes an awful lot deeper than that. We Americans have often been accused by our neighbors around the world of being a mile wide and an inch deep. I for one think it is about time we stopped proving them right.

By Andy Sutton

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit

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